Central Bank of Kenya

FINANCIAL INCLUSION GOOD FOR FINANCIAL SECTOR INVESTMENT AND

DEVELOPMEMNT

PROF. NJUGUNA NDUNG’UGOVERNOR, CENTRAL BANK OF KENYA

At

Frankfurt Global Business Week;

Business Opportunities in Africa Conference.

Frankfurt, Germany19th May, 2011

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INVESTMENT OPPORTUNITIES IN AFRICA: FOCUS ON MICROFINANCE AND MOBILE BANKING

Outline

Financial Inclusion Leading Financial Vibrancy and Development

Financial inclusion Profile

The Regulator’s Role

Outcomes

Investment Opportunities

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Financial Inclusion for Financial Development

Nearly 3bn. people in developing countries have little or noaccess to formal financial services that can help them increasetheir incomes and improve their lives (World Bank).

Is there a missing market for them?

Most African economies have evolved from a period of missingmarkets and missing institutions.

Financial Inclusion: making financial markets vibrant

-Brings more participants to the market

-The poor want a safe haven for their deposits

-Increased deposits enlarges capacity for banks to lend

-Financial innovation is possible: development anddeepening4

Financial inclusion for Financial Development..

Bond markets and capital markets have developed

Strategies to enhance financial inclusion therefore are acritical component for financial development

Financial Inclusion: solving supply and perhaps demandside constraints have opened markets and financialsector has become very vibrant

Access to financial markets: Good for the poor: Assetaccumulation through savings and credit

This has potential to increase vibrancy in the market-capacity

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STATUS OF FINANCIAL INCLUSION IN

SELECTED AFRICAN NATIONS

FinScope Zambia (2009) and FinAccess (2009)

KEY

Formal – use a bank, Post

Bank or insurance product.

Formal other – do not use

any formal product, but use

services from non-bank

financial institutions such as

SACCOs and MFIs.

Informal – do not use any

formal/formal other products

but use informal financial

service providers such as

ASCAs, ROSCAs and

groups/individuals other than

family/friends.

Excluded – use no

formal/formal other or

informal financial. .services.

Kenya’s Financial Inclusion has progressed

Kenya’s financial sector has undergone significant transformation in the last few years;

◦ The financial infrastructure has slowly come into place,

◦ The market response has been swift,

◦ Economic activity has supported growth

In the last 6 or so years, we have seen:-

o Significant decline of barriers to entry to the financial sector

o Significant decline in cost of maintaining micro accounts

o The introduction of new instruments targeting lower segments of the population.

o Increased branch network of branches across the country

But still segments of market exist; we have 43 banks divided into large, medium and small banks as well as Deposit Taking Microfinance Institutions (DTMs)

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Kenya’s Financial Inclusion Results so far

The effects have been felt: some results are quite significant;

1. Deposits and deposit accounts have increased

2. Loan accounts have increased

3. Banks competing and room for mergers and

consolidation

4. Investment in service provision or financial

infrastructure; Risk analysis and credit risk ratings

are going to be important

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The Regulator’s Role

CBK has provided space for innovative solutions;

1. Mobile Phone Financial Services Platform - Use of mobile phones for person to person, person to business, business to person and ATM payment transfers.

2. Licensing of Deposit Taking Microfinance (DTM) Institutions -Nationwide and Community MFIs.

5 DTMs ( one community based ) licensed so far with 47 branches across

country.

3. Deposit Protection Fund-Covers up to Ksh. 100,000 (USD 1,250) covers 90% of total accounts in the financial sector.

4. Expansion of Branch Network of Commercial Banks

Increase from 534 in 2005 to 1072 by end of March 2011, distributed well

across the country.

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5. Agent Banking – Turning non-bank outlets into financial services providers.

So far 8,809 agents approved, leveraging on mobile phone agents also. Agents to push forward financial inclusion frontiers.

6. Enhancement of core capital – for commercial banks; New minimum core capital by 2012

7. Consumer Protection - The missing link in financial inclusion.

Consumer protection rights entrenched in Kenya’s new constitution.

New Constitution; A legal framework to support development of strong institutions to grow and support the market.

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The Regulator’s Role

Macro-level Support

Credit Reference Bureaus - Extending credit based on

financial identity

Over 750,000 records have been submitted to the CRB by banks and

DPFB institutions.

Banks have accessed over 500,000 credit reports; whereas

Individuals have accessed slightly over 1,000 credit reports.

◦ Currency Centres - Reducing Cash in Transit Costs for banks and their branch networks across regions:-

Three Centres have been established with the first having been

operationalised end 2009/early 2010.

◦ Financial Education through a financial regulators joint

effort.

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Other Supporting Financial Infrastructure

Outcomes - Expanding Financial Services:

Branch Networks, MFIs

Increase from 534 in 2005 to 1072 end of March 2011.

Growth driven mainly by competition and declining barriers to entry.

Overall growth as at was 101%; and 148% growth in rural branches compared to 76% growth in urban areas.

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Source :Central Bank of Kenya, 2011

181 170

288350

418447 449

353405

452

537578

620 623

534575

740

887

996

1067 1072

0

200

400

600

800

1000

1200

2005 2006 2007 2008 2009 2010 Mar-11

Rural

Urban

Total

Outcomes - Growth of Kenyan Banking Sector and

Deposit Protection Fund (DPF) - Deposit Accounts

Number of deposit accounts has increased from 2.55 million in 2005 to nearly 13.3 million at end of February 2011.

Number of micro accounts has increased by over 400% from about 2.14 million accounts in 2005 to about 12.2 million accounts at end of February 2011.

Growth attributable to reduced costs of maintaining micro accounts and introduction of innovative instruments.

But also increased branch outlets that solve the physical distance.

Barriers of entry have been significantly reduced.

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0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

Micro Accounts

Other Accounts

Source :Central Bank of Kenya, 2011

Outcomes – Net Loans and Advances

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495.4

631.2

721.6

876.4

949.1

0

100

200

300

400

500

600

700

800

900

1,000

2007 2008 2009 2010 Mar-11

Net Loans and Advances

• Net loans have increased from 495.4 billion in 2007 to 949.1 billion at end of March 2011.

• Growth is largely accredited to the financial Inclusion reforms and initiatives, innovations especially technological led innovations and financial awareness initiatives

Source :Central Bank of Kenya, 2011

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Outcomes – Mobile Phone Financial

Services-M-Pesa Flows, Volumes & Values

Source :Central Bank of Kenya, 2011

Outcomes – Agent Banking: Nature and

Distribution

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NATURE

TELECOMS RELATED INDEPENDENT/INDIVIDUAL TOTAL

6,740 2,069 8,809

DISTRIBUTION

RURAL AREAS URBAN AREAS TOTAL

67% 33% 100%

Source :Central Bank of Kenya, 2011

From Money Transfer to Mobile Financial

Services…

For the last three years, millions of Kenyans have been able to use mobile phone platforms to make payments and send remittances.

In 2009 mobile phone platforms began being integrated with banking platforms.

One of the criticisms then was that mobile phone money transfers did not seem to affect financial intermediation significantly.

In May 2010, Equity Bank partnered with Safaricom to launch M-Kesho account that goes beyond transfers to micro-savings, micro-credit and micro-insurance.

Since the launch, over 786,000 M-Kesho accounts have been opened with over USD 8.5 million mobilised.

Other banking products that leverage on mobile phone technology include KCB Bank Connect and Family Bank’s Pesa Pap.

Other mobile phone operators have also launched their mobile money products – Zain (Zap) and Essar (Yu Cash).

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Kenyan Banks Expansion to the EAC Region

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Name of Bank Number of Bank Branches in:

Kenya Tanzania Uganda Rwanda Burundi

Kenya Commercial

Bank (KCB)

169 11 13 9 -

Equity Bank 116 - 43 - -

Diamond Trust Bank 32 10 15 - 2

Fina Bank 15 - 5 9 -

NIC Bank 16 3 - - -

Commercial Bank of

Africa (CBA)

19 5 - - -

I&M Bank 16 3 - - -

KCB has another 11 branches in Southern Sudan Equity Bank has 3 branches in Southern Sudan I&M Bank has 14 branches in Mauritius through its subsidiary Bank

One Limited

Source :Central Bank of Kenya, 2011

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Profitability Indicators

35.6

43.3

48.9

74.3

19.8

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2007 2008 2009 2010 Mar-11

Profits Before Tax

Source :Central Bank of Kenya, 2011

951.2

1,183.7

1,353.5

1,678.1

1,810.4

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2007 2008 2009 2010 Mar-11

Total assets

Investment Opportunities

There is a potentially huge market of the unbanked waiting to be discovered-32.7% as at 2009.

Need for more stronger players to enhance competition-opportunities for equity or debt financing opportunities.

Credit Information sharing –Room for more players to promote competition and enhance quality of reports.

Credit rating – more rating companies on performance of institutions to enhance their position and unleash their potential

Variety of products limited- room for more innovative financial products especially leveraging on IT platform

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